I was searching around yesterday for a Mac Book Pro, and made the ever-so tempting mistake of clicking on the following Google Ads Result, “86% off a Mac Book Pro?” – I am not stupid — I know that when things are too good to be true, they are not true — but somehow my curiosity overpowered my rationality, and I clicked the link. What I found was a site so devious, so tricky, so evil, yet so potentially profitable (and ‘I think’ legal), that I could only wish that I had thought of the business model first. The site is Swoopo.com – an auction site with an evil, evil twist that preys on human irrationality to make a ridiculous amount of money. Here is how it works:

Users can bid on items, but they don’t bid by specifying a price…they use a ‘bid’ that they have purchased

‘Bids’ can be purchased for 75 cents each

Each time a user ‘bids’, two things happen: 1. The final cost of the item to the winning bidder is increased by a fixed amount (e.g. 15 cents) 2. The auction end time gets extended by a fixed amount of time (e.g. 20 seconds)

The last person to ‘bid’ on an item before the auction expires is the winner, and must pay the total price of the item (e.g. the total number of bids multiplied by the fixed price amount increase noted above).

This is a little complicated, but here’s an example. Lets say that I purchased 100 ‘bids’ for a total cost of $75 dollars. The Mac Book Pro auction that I am checking out has a current price of $100 and a current time left of 10 seconds. I decide to use one of my bids on the item, and now I am the ‘current winner’. Because of my bid, the price of the MBP has increased to $100 + $0.15 = $100.15, and the auction now is over in 10+20 = 30 seconds…of course, other people are going to ‘bid’ against me, but lets say I spend a few hours checking the auction, and use all my bids….and I am somehow, beyond my wildest imagination, the last bidder. I have won the auction! Now, if the final price of the computer is $300, and I have spent $75 on the 100 bids, then I have bought a MBP for $375. Sweet! So Swoopo must not be making too much money right??? Wrong. They have made money…a lot of money – In fact, on this auction for a Mac Book Pro, I calculate that they have made almost 20 thousand dollars…

If you do the math on the above MBP auction….
* There have been 25,529 bids. This auction is a ‘penny auction’ meaning that each bid only increases the final cost of the item by a penny, so $255.29 indicates 25,529 bids. At 75 cents a pop, this is $19,146.75
* The final cost for the winner is $255.29
* Adding the two costs above, we are very close to a total profit of 20 thousand dollars!!!

But what’s that you say? The cost is spread across so many users that it doesn’t matter to any individual? One would hope so, but look at the poor winner of the auction. He has bid a total of 2872 times!! At 75 cents a pop, this is already over 2 grand for something that costs $1299 retail. To add insult to injury, he still has to shell out the $255.29 to purchase the computer.

So how does this business model work? How are people this stupid? And why didn’t I come up with this? Well, I can’t answer the last question, but I will try to answer the first two:

Although the business model may be new, the concept behind it is not. In fact, it is a published economic game / theory known as Dollar Auction. It exploits flaws in the calculations of expected value for a given game. At a high level, this model seems to work because

It exploits a human irrationality where individuals think they will be the one who bids last - Everyone thinks they’re lucky once in a while…but really…do you think there aren’t 100s of other people out there thinking that they’ll bid last too? Thinking it to be true will not make it true…but it will make Swoopo a lot of money

It exploits the sunk cost fallacy - If I keep bidding on an item, I will become tied to that item, thinking that since I have spent money by bidding so many times on the item, I must win it at all costs…even if economically it isn’t the right think to do (e.g. guy who won the Mac Book Pro Auction)

It isn’t transparent - To an average Joe, it isn’t obvious what is going on. On EBay it is easy to see how much you will pay for the item, and understand how much the seller is making. On Swoopo, it isn’t transparent…and people will keep the bidding coming.

It is like gambling - Why do people go to the casino? Obviously, not to make money — unless they’re kidding themselves or are playing Poker. People probably get the same rush from this site as they may get from putting it all on Red. There’s a chance to win at a small cost, many times over.

Anyway, that’s all I got on this site…what do you guys think? Should this be legal? Is it gambling? Are there any other sites out there that have wacky business models? I want to know about them!…I can’t say that I’m not jealous - the idea is simple and profitable - what else can you ask for?

I know what I am going to do next - search google for ‘economics irrational behavior’, and try to develop a business model around the results. Or maybe I’ll go back and re-read Nudge or Predictably Irrational, and see how to profit from human economical irrational decisions… is this an awful thought? Or is this just business as usual?